Transient Institutional Investors and Insider Trading Signals

Publication Type

Journal Article

Publication Date

6-2011

Abstract

Purpose: The aim of this paper is to examine how informed traders, i.e. transient institutional investors that actively trade on information to maximize investment profits, use insider trading signals in addition to accounting numbers to mitigate future abnormal returns. Design/methodology/approach - Using a sample of 44,843 firm-quarters from 1988 to 2001 in the USA, the paper examines how informed investors use insider trading signals and the extent to which the use of these signals by informed investors impacts insiders' future abnormal returns from trading. Findings - This study finds that the change in transient institutional ownership in the next-quarter is positively associated with net insider trading in the current quarter, after controlling for accounting information (including total accruals, unexpected earnings, etc.). In addition, this study finds that insider profits decrease in transient institutional ownership, consistent with the notion that trading by informed investors limits insider profits. Research limitations/implications - The institutional ownership data are only available on a quarterly basis, which may not capture institutional investors' immediate response to insider trading signals. Originality/value - This study provides systematic evidence on how informed traders use insider trading signals. This study adds to existing knowledge of the information environment of institutional investors by showing that transient institutional investors use insider trading signals in addition to accounting information in making investment decisions. Moreover, this study contributes to the literature on the determinants of insider profits by providing evidence that informed trading by investors has incremental power to explain insider profits.

Keywords

Accounting, Accounting information, Insider trading, Investors, Singapore

Discipline

Accounting | Asian Studies | Finance and Financial Management

Research Areas

Financial Performance Analysis

Publication

International Journal of Accounting and Information Management

Volume

19

Issue

2

First Page

118

Last Page

145

ISSN

1834-7649

Identifier

10.1108/18347641111136436

Publisher

Emerald

Additional URL

https://doi.org/10.1108/18347641111136436

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